RIA Compliance and Practice Management Blog

Top RIA Compliance Deficiencies: Advertising

Posted by RIA in a Box

Sep 20, 2014 10:30:00 AM

In 2013, coordinated state exams conducted by members of the North American Securities Administration Association (NASAA) uncovered the top registered investment adviser (RIA) compliance deficiencies across 20 categories. Last week we discussed the deficiencies in brochure delivery, specifically annual delivery, material change delivery, and initial delivery.

In this week’s installment we’ll cover another common RIA compliance deficiency category: Advertising. The 2013 NASAA investment adviser examination report contains results from 1,130 investment advisory firms examined. In the advertising category, of all RIA firms examined, 18.1% of audits noted at least one deficiency. This figure is slightly less than the 21.6% of audits which revealed advertising-related deficiencies in the 2011 NASAA investment advisor report.Download our free white paper: RIA Systems and Operational Best Practices

According to the 2013 report, 19.3% of firms with less than $30 million in regulatory assets under management (AUM) had advertising-related deficiencies, compared to 16.4% of investment advisory firms with more than $30 million in AUM. Just under 20% of RIA firms audited for the first time had advertising-related deficiencies compared to slightly below 15% of firms that had previously been examined.  In other words, previously examined firms performed slightly better than their peers going through their first regulatory examination.

As previously stated, 18.1% of investment advisory firms examined in 2013 had advertising-related deficiencies. The Chief Compliance Officer (CCO) of each investment adviser firm should to be aware of the top advertising compliance deficiencies. In 2013, the top issues were:

  1. Insufficient website disclaimer (19.2%)
  2. Misuse of “RIA” or “IAR” (18.4%)
  3. Qualifications, services, or fees (13.2%)
  4. Other misleading statements or omissions (10.2%)
  5. Misleading use of other professional designation (6.0%)

The most common places these deficiencies were found were:

  1. Website (27.4%)
  2. Business cards/Letterhead (12.8%)
  3. Social media (4.9%)
  4. Flyers/Pamphlets (4.9%)
  5. Newsletters (3.8)

The 2013 report also notes that 32.7% of investment advisor firms that advertise performance were found to have at least one regulatory compliance deficiency related to the performance advertising. The top issues were:

  1. No disclosure if results reflect reinvestment of dividends or other earnings (10.9%)
  2. Results compared to dissimilar index without disclosure of material differences (9.1%)
  3. Actual portfolios: Misleading results due to inclusion or exclusion of any accounts (7.3%)
  4. Suggestion of profit not balanced by disclosure of possible loss (7.3%)
  5. Effects of material market or economic conditions not disclosed (7.3%)

When advertising, all RIA firms need to endure that the marketing is not false, misleading, or deceptive in any way. To avoid advertising-related compliance issues, RIA firms should review all advertisements, starting with its website, for accuracy and proper disclosures. As RIA compliance consultants, we strongly encourage the CCO of the investment advisory firm to review all of the firm’s marketing material and to continue to exercise great caution when considering performance advertising or marketing.

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Topics: RIA Compliance

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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